Walgreens Seeks Elixir in China’s Largest Drug Distributor

Pharmacy giant Walgreens Boots Alliance Inc. has made its largest investment in China, acquiring a 40% stake in the retail business of the country’s largest drug distributor by revenue.

The investment of nearly 2.8 billion yuan ($420 million) will go to Sinopharm Holding Guoda Drug Store Co. Ltd., the retailer unit of Sinopharm Group Co. Ltd.

Sinopharm’s Guoda Drug Store had nearly 3,700 locations by the end of June this year in 70 major cities across China. Its sales have topped the domestic industry for the past five years.

Walgreens Boots Alliance CEO Stefano Pessina has “struggled” to build a presence in China, he told the Financial Times in January. Pessina is a well-known dealmaker, who turned his failing drug-wholesaler family business into a world player by merging with several rivals, including UK pharmacy Boots in 2006 and U.S. peer Walgreens in 2014.

Walgreens entered the pharmacy business in China a decade ago through a joint venture with wholesaler Guangzhou Pharmaceuticals Corp., with an investment of $69 million. In 2012, it spent $75 million to buy a 12% stake in another distributor, Nanjing Pharmaceutical Co. Ltd.

Walgreen’s investment in Nanjing Pharma helped the latter achieve annual profit growth of more than 60% between 2013 and 2016, according to a report by Hua Chuang Securities.

The Sinopharma investment may help introduce Walgreen brands to China and assimilate its management culture, analysts at Hua Chuang Securities said.

Walgreens Boots Alliance operates several popular drug retail and health care brands, including Walgreens, Duane Reade, Boots, Alliance Healthcare, No7, Soap & Glory, Liz Earle, Sleek MakeUP and Botanics. But they have had little presence in China, a market with an expanding middle class and growing demand for higher quality health care products.

The deal also comes at a time when e-commerce giant Amazon Inc. is reportedly in talks to enter the pharmacy space. But Walgreens CEO Pessina seems unworried.

Amazon “will not come in an industry so complicated as our industry,” he said in an interview with Forbes on Wednesday.

But the drug distribution business in China can be complicated. Earlier this month, U.S.-based Cardinal Health Inc. sold its China unit to Chinese peer Shanghai Pharmaceuticals Holding Co. Ltd. for $1.2 billion. Cardinal had reportedly been concerned about China’s impending reform of the country’s drug distribution regulations.

China’s drug distribution industry is dominated by three big players: Sinopharm, China Resources and Shanghai Pharma. Smaller local companies rely on their tangled relationships with local health care institutions, according to a report by consultancy Strategy&, under PricewaterhouseCoopers.

Walgreens’ investment in the top player might give it a big slice of the China pie, but the deal is still pending anti-monopoly reviews by China’s Ministry of Commerce.

Contact reporter Coco Feng (renkefeng@caixin.com)